Are You a Biotech Company Eyeing an IPO? Be Sure to Assess These 3 Areas First

The initial public offering (IPO) market for biotech companies has picked up steam in 2017, following a lackluster year (2016) that saw thefewest biotech IPOs since 2012. The positive buzz biotech stocks have been generating of late has many startups and other private firms in the sector wondering if now is the time to start making plans to go public.

An IPO can help a biotech company raise capital quickly to support research and development (R&D), finance clinical trials and get products successfully to market. Market conditions and the overall health of the business sector are important considerations for any company pursuing an IPO, of course. But these factors relate more to the question of “when” to go public rather than “whether.”

All companies face the same basic challenges when trying to work toward public company readiness (PCR). But there are three specific areas, discussed below, that biotech companies should thoroughly assess when deciding whether to go public:

The Development Pipeline

Does your organization have the right people, processes and technologies — and sufficient capital — required to develop, maintain and protect a viable pipeline for your drug or formulary? When you pursue an IPO, potential investors won’t be focused on revenues or earnings. They will want to know the state of your company’s development pipeline, and whether you have the funds to support R&D throughout your product’s long and challenging journey to the market.

Intellectual Property (IP) Rights

Rest assured, the status of your IP will be under the microscope as your business prepares for an IPO, as it can significantly impact valuation and investor confidence. The future success of a biotech company hinges greatly on whether it has the right processes and controls to protect its IP.

Biotech firms looking to list should therefore confirm the ownership and enforceability of their IP — from drug formulas to manufacturing processes. Are IP licenses in order? Could any third parties potentially swoop in and acquire IP rights? What written agreements (e.g., with vendors or employees) exist that could impact IP ownership?

IP laws are very complex, so biotech companies will be wise to seek expert counsel in this area sooner rather than later.

The Long-Term Plan

Once your drug or formulary is approved to go commercial, does your organization have the people, processes and capital to support that transition? It might be many years before your product makes it through the approval process and you are able to get a new drug application filed and approved by the U.S. Food and Drug Administration. Regardless, the investor community, underwriters and industry experts will want to know that you have a solid action plan in place for taking your product to market as soon as it’s given the green light.

Other Pre-IPO Considerations for Biotech Companies

The three areas listed above are critical for biotech firms to address as they begin the IPO process. But your business will also want to take special care to assess its strength in two other key areas, which are common pitfalls that can delay or derail the IPO process:

Corporate documentation. Biotech companies are so consumed by R&D activities that they don’t always pay enough attention to the business of being a business. Corporate documentation can be messy — or nonexistent in some cases. During the due diligence phase, a wide range of corporate documents, from contracts to leases to the company’s general ledger, will be thoroughly scrutinized. So, it’s essential to be proactive about getting your “documentation house” in order. You should also identify the appropriate people in your organization who can answer any questions underwriters or legal counsel may have about the history, content and status of those documents.

IT infrastructure. IT infrastructure plays a critical role in a firm’s ability to conduct accurate, timely and effective financial reporting and meet regulatory compliance requirements. Biotech companies should assess their IT infrastructure prior to their IPO effort and determine if they need to make substantial upgrades to handle anticipated growth. Be sure to also take a hard look at your IT organization (if you have a formal department) and decide if that area of the business requires transformation. This is the time toassess IT security, as well, including confirming that the tools used to store and share sensitive information have been configured properly and aren’t vulnerable to hackers.

Biotech firms, like all organizations eyeing an IPO, should also take care not to underestimate the following realities of the PCR journey:

Costs. Ramping up for an offering is expensive. A sample budget for a US$100 million IPO could range from $3 million to $4 million. That’s not counting the underwriter’s commission, which is usually about 7 percent of the total public offering price. There are also legal fees, accounting fees, listing fees, and other expenses.

The sheer effort required. Preparing for and executing an IPO involves major business transformation and operational disruption. These can prove heavy burdens for biotech startups running lean. Regulatory compliance, financial reporting, IT, talent management, policies and procedures, and corporate governance, are just some areas that will require management’s attention along the PCR journey.

The need for thorough preparation before undertaking an IPO simply cannot be overstated. And while it always helps to have the winds of a favorable market at your back, the main thing that really matters — and that investors will care about — is whether your biotech company is prepared to succeed in the future after it becomes a public company.